LBTT Guidance on Tax Relief for Alternative Property Finance with Common Ownership
LBTT relief for alternative property finance where buyer and lender own as tenants in common
This relief can apply to certain alternative property finance arrangements where a financial institution and an individual buy a property together as owners in common, the individual has exclusive occupation, and can later buy out the institution’s share. Its purpose is to stop Land and Buildings Transaction Tax being charged more than once just because the purchase is structured differently from a normal mortgage.
- The initial purchase by the individual and the financial institution is usually the main LBTT chargeable transaction.
- Relief may then be available on the agreement giving the individual exclusive occupation, and on later transfers of the institution’s share, if the legal conditions are met.
- For later transfers to qualify, the property must remain owned in common by the same parties throughout, and the individual must continue to occupy the property as required.
- Relief is not available in some cases, including where certain company reliefs apply or have been withdrawn, where control of the financial institution is being acquired, or where the institution transfers the property to an outside third party.
- A later transfer is generally only notifiable for LBTT when it transfers all of the institution’s remaining share to the individual.
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Read the original guidance here:
LBTT Guidance on Tax Relief for Alternative Property Finance with Common Ownership
LBTT alternative property finance relief where the buyer and financial institution own the property in common
This page explains a form of Land and Buildings Transaction Tax relief for certain alternative property finance arrangements. It applies where a financial institution and an individual buy a property together as owners in common, the individual is given exclusive occupation, and the individual has the right to acquire the institution’s share later in one or more stages. The aim is to prevent multiple LBTT charges arising simply because the purchase is structured in this way rather than through a conventional mortgage.
What this rule is about
Some alternative finance arrangements involve more than one land transaction. Instead of the buyer acquiring the whole property outright with mortgage finance, the financial institution and the buyer acquire the property together. The buyer then gets the right to occupy it exclusively and, over time, can require the institution to transfer its share.
Without special rules, that structure could trigger LBTT more than once: on the initial acquisition, on the grant of occupation rights, and again when the institution’s share is transferred. Schedule 7 to the LBTT(S)A 2013 is designed to stop that happening where the statutory conditions are met.
The policy stated in the guidance is parity with a conventional mortgage. In other words, if the arrangement is carried through in the way the legislation requires, the tax result should broadly match the result for a normal financed purchase, rather than imposing extra LBTT because of the financing model.
What the official source says
The relevant relief applies where:
- a financial institution and a person buy a property as owners in common,
- the institution grants that person an exclusive right to occupy the property, and
- the person has the right to require the institution’s interest to be transferred to them in one or more later transactions.
The legislation then deals with the arrangement in stages.
The first transaction is the initial purchase of the major interest in land by the financial institution and the person as owners in common. That transaction is generally chargeable to LBTT. However, the guidance says relief may be claimed by the financial institution in limited cases, including where the seller is the person entering into the arrangements, or another financial institution that previously acquired the interest under equivalent arrangements with that person.
The second transaction is the agreement giving the person the exclusive right to occupy the land. Relief may be claimed on that transaction by the person, provided the requirements relating to the first transaction have been met, including payment of any LBTT due on the first transaction.
Further transactions are later transfers of the institution’s interest, where the person exercises their right to require transfer and the property is in fact transferred to them. Relief may be claimed on those later transactions if the conditions for the first and second transactions have been met and, throughout the period between the second transaction and the later transfer:
- the interest from the first transaction has been held by the financial institution and the person as common owners, and
- the land has been occupied by the person who was granted the exclusive occupation right.
The legislation also disapplies certain normal LBTT rules for these later transactions. In particular:
- the agreement for a further transaction is not treated as substantially performed unless and until the whole of the institution’s interest has been transferred, and
- the agreement is not treated as the grant of an option for the purposes of the normal rules on options and rights of pre-emption.
A further transaction benefiting from the relief is not notifiable unless it transfers to the person the whole of the institution’s remaining interest that has not already been transferred under an earlier further transaction.
The guidance also says the relief is not available in certain situations. In particular, it is not available:
- where group relief, reconstruction relief or acquisition relief is available for the first transaction, or has been withdrawn from the first transaction, or
- where the alternative finance arrangements involve arrangements, or connected arrangements, for someone to acquire control of the financial institution.
For this purpose, connected arrangements are arrangements entered into in connection with the alternative finance arrangements. Control of the financial institution is determined using section 1124 of the Corporation Tax Act 2010.
The relief is also not available if:
- the financial institution transfers the property to a third party outside the original arrangements, or
- during the life of the arrangements the property was not held by a financial institution and the person as owners in common.
What this means in practice
The practical effect is that the structure is taxed as a single financed purchase rather than a series of separately taxed land acquisitions, provided the arrangement stays within the statutory model.
In practice, the initial acquisition is the key starting point. That first transaction is generally the one on which LBTT is charged. The later steps are then relieved if the arrangement is implemented properly.
This matters because the later steps can otherwise look, in legal form, like separate land transactions:
- granting exclusive occupation could look like a transaction in land, and
- each later transfer of the institution’s share could look like another taxable acquisition.
The relief removes those extra charges, but only if the statutory conditions continue to be satisfied. The structure must remain one where the institution and the person hold as common owners until the agreed transfers take place, and the person must remain the occupier in the required sense.
The notifiability rule is also important. A partial transfer of the institution’s interest under a qualifying further transaction may not need to be notified. But the final transfer of the institution’s remaining interest generally is notifiable. That is a filing point that needs to be tracked carefully.
The source also explains that the institution’s interest acquired in the first transaction is treated as an exempt interest for certain purposes. That means a transfer of that exempt interest does not itself give rise to tax and is not notifiable. But this does not turn the first transaction or the further transaction itself into exempt interests. Those transactions remain within the LBTT framework, with relief applying where the statutory conditions are met.
How to analyse it
A sensible way to analyse these arrangements is to work through the following questions.
- Is the structure the right type of arrangement? There must be a purchase by a financial institution and a person as owners in common, an agreement for exclusive occupation, and a right for the person to require transfer of the institution’s interest in one or more stages.
- What is the first transaction? Usually this is the initial purchase of the major interest in land. Check whether LBTT is due on that transaction and whether any special relief for the institution is available under the narrow cases described in the legislation.
- Has the first transaction been properly dealt with? Relief on the second transaction depends on the requirements for the first transaction being met, including payment of any LBTT due.
- What is the second transaction? Identify the agreement that gives the person the exclusive right to occupy the property. That is the transaction on which the person may claim relief.
- What are the further transactions? These are later transfers when the person exercises the right to require transfer of the institution’s share. Check that the transfer is made to that person and under the agreed mechanism.
- Has the ownership position remained intact throughout? Between the second transaction and any later transfer, the property must continue to be held by the financial institution and the person as common owners.
- Has the occupation condition been met throughout? The land must be occupied by the person who was granted the exclusive occupation right.
- Is any exclusion in point? The relief is blocked if certain corporate reliefs apply to, or have been withdrawn from, the first transaction, or if there are arrangements for someone to acquire control of the financial institution.
- Has the institution transferred to an outside third party? If so, the relief is not available.
- Is the transaction notifiable? A qualifying later transfer is only notifiable if it transfers the whole of the institution’s remaining interest.
This framework shows that the relief is not just about the wording of the finance documents at the start. It also depends on what happens over time.
Example
Illustration: A financial institution and A buy a dwelling together as owners in common under an alternative finance arrangement. A is granted the exclusive right to occupy the property. The documents also give A the right to require the institution to transfer its share to A in stages.
The initial acquisition is the first transaction. That is generally the transaction on which LBTT is considered in the normal way.
The agreement giving A exclusive occupation is the second transaction. If the first transaction has been properly complied with, including payment of any LBTT due, relief may be claimed on that second transaction.
Later, A exercises the contractual right to acquire part of the institution’s share. If throughout that period the property has remained owned by A and the institution as common owners, and A has occupied the property as required, relief may be claimed on that later transfer as a further transaction.
If the institution eventually transfers the balance of its remaining share to A, that final further transaction will generally be the point at which notification is required.
Why this can be difficult in practice
The statutory model is precise. Small changes in how the arrangement operates can matter.
One difficulty is identifying whether the arrangement really fits the owners-in-common structure required by the legislation. If the legal ownership, occupation rights, or transfer rights differ from that model, the relief may not apply.
Another difficulty is the need for continuity over time. Relief on later transfers depends on conditions being met not just at the start, but throughout the period between the second transaction and the later transfer. A break in common ownership, a transfer to a third party, or a failure of the occupation condition can stop the relief being available.
The exclusions also need careful checking. The source makes clear that the relief is unavailable where certain other reliefs are available for, or withdrawn from, the first transaction. It is also blocked where the arrangements involve acquisition of control of the financial institution, including through connected arrangements. That can require a wider factual review than the land documents alone.
The exempt interest rules can also be misunderstood. They do not mean the whole arrangement falls outside LBTT. Rather, they give special treatment to the institution’s interest in the circumstances defined by the legislation. The first and further transactions still need to be analysed under the relief provisions and notifiability rules.
Key takeaways
- This relief is designed to stop multiple LBTT charges where a property is bought through a qualifying owners-in-common alternative finance structure.
- The first transaction is generally the main chargeable transaction; the occupation agreement and later transfers can be relieved if the statutory conditions continue to be met.
- The relief can fail if the ownership structure changes, the property is transferred to an outside third party, the occupation condition is not maintained, or an exclusion applies.
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Useful article? You may find it helpful to read the original guidance here: LBTT Guidance on Tax Relief for Alternative Property Finance with Common Ownership
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